Italy is spending €17 billion to wind up 2 failing banks

A woman pushes her Fiat 500 car as her dog sits inside, in a neighbourhood of Rome March 23, 2012. Picture taken March 23, 2012.
REUTERS/Alessandro Bianchi
The Italian government has set aside as much as €17 billion to help with the winding down of two collapsed regional lenders, Popolare di Vicenza and Veneto Banca.

The two banks collapsed following numerous years of mismanagement and bad choices regarding lending, leaving the future of billions of euros worth of assets up in the air. However, after the government stepped in, the bank's good assets will be transferred to the nation's biggest retail bank, Intesa Sanpaolo.

Italy's government will pay €5.2 billion to Intesa, and give it guarantees of up to €12 billion so that it will take over the remains of Popolare di Vicenza and Veneto Banca, preventing a run on the banks. That figure is close to three times the expected rescue deal.

The deal was approved by the European Commission, despite criticism from some commentators that the deal places too heavy a burden on the Italian taxpayer. By undertaking the winding up on its own terms, the Italian government has managed to avoid the possibly more highly punitive rules of the Commission when it comes to bank rescues.

The Commission decision allows Italy to take measures to facilitate the liquidation of the two banks: Italy will support the sale and integration of some activities and the transfer of employees to Intesa Sanpaolo.

"Those who criticise us should say what a better alternative would have been. I can't see it," Finance Minister Pier Carlo Padoan told reporters, according to a report from Reuters.

Padoan said that on top of the €5.2 billion euros payment to Intesa, which includes €1.3 billion to cover job cuts, the state will offer guarantees to fund potential losses arising from due diligence of the two banks' soured and risky loans, Reuters reports.

The total stock of nonperforming loans, or NPLs, held by Italian banks is estimated to be roughly €360 billion.

Virtually every single bank has a big problem with these loans, and there were fears last summer that the entirety of the Italian banking sector could be brought down by these bad loans. The problem is by some measures bigger than the situation Greece faced in its 2015 crisis: Although the Italian banks are generally better capitalised than their Greek counterparts, the size of the Italian economy makes their potential collapse much more serious than Greece.